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October 17, 2013

El-Erian, Fink, Advisors on What’s Next in Wake of Debt Deal

No one is happy, but the impact on clients might not be as bad as you think

(Photo: AP)

The costs and impact to the country and its citizens in the wake of Tuesday’s deal to end the government shutdown and raise the debt ceiling began to be tallied Thursday, as federal employees returned to work after more than two weeks.

“[L]et’s be clear: There are no winners here,” President Barack Obama said from the White House Wednesday morning. “These last few weeks have inflicted completely unnecessary damage on our economy. We don’t know yet the full scope of the damage, but every analyst out there believes it slowed our growth.”

Indeed, Standard & Poor's said a day earlier that the shutdown “to date has taken $24 billion out of the economy” and "shaved at least 0.6% off annualized fourth-quarter 2013 GDP growth."

Well-known prognosticators also weighed in. Writing for Business Insider, PIMCO’s Mohamed El-Erian said investors “need only focus on three points: markets were delighted with the "what;" they are worried about the "how;" and the “how” matters going forward.”

“Instead of decisively emerging from a damaging phase of political dysfunction, Congress appears still stuck in what game theorists would call a repeated game with suboptimal outcomes,” El-Erian said.

BlackRock’s Larry Fink told Bloomberg Television that “We are going to see a lower equity market and a longer period of lower rates” if earnings start to deteriorate in the fourth quarter following the stalemate.

Advisors, for their part, were addressing concerns by telling clients to sit tight.

“For the last month, in every client meeting it has been the No. 1 issue,” said Jeffrey Heasley, executive vice president and financial consultant with Pittsburgh-based Private Wealth Advisors. “I tell them that had we actually gone over the cliff, it would have been a game changer, but this is really more about the panic surrounding a default than the effects of a default itself.”

Heasley did say the increased market volatility created by the shutdown could “present opportunities going forward, but we haven’t seen any yet.”

“We sent out a newsletter about a week ago and asked clients to hold tight because it’s a political conundrum and it shouldn’t have any impact on the portfolio other than some short term volatility,” the president and director of wealth management with Boston-based Heritage Financial Services explained. “Our clients are totally cool with it. A small handful asked to go to cash, but we talked them out of it. They stayed fully invested and benefited as a result.”

Paul Puckett, vice president and portfolio manager with 1st Quadrant Asset Management, a Virginia Beach, Va.-based RIA, said he hasn’t heard from his clients about the shutdown.

“It’s all about what you do before the crisis hits,” Puckett said, alluding to the need to set expectations up front. “Clients tell me I say the same thing to them every January, which is ‘How do you feel about losing 50% of the value of your portfolio by the end of the year?’ Because that can happen in any given year. When it does happen, and the portfolio loses 30%, I call them and they say, ‘cool, I actually thought I was down 50%.’ Once the boat is rocking, it’s too late to calm the passengers. If I do the extra work on the front end, I won’t have to do it when the surprises hit.”